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Smart Money

The University of California invests $53 million in two diploma mills controlled by UC Regents chairman Richard C. Blum

June 30, 2010 - by Peter Byrne

Photograph by Curtis Cartier

A YEAR ago, Richard C. Blum, then the chairman of the Regents of the University of California, spoke at the Milken Institute's Global Conference 2009, held at the Beverly Hilton in Los Angeles. The corporate confab was hosted by Michael Milken, the "junk bond king" who went to prison in the aftermath of the savings and loan fiasco in the 1980s.

Milken, who is barred from securities trading for life by federal regulators, has since re-created himself as a proponent of investing in for-profit educational corporations, an industry that regularly comes under government and media scrutiny in response to complaints of fraud made by dissatisfied students.

At the conference, Blum, who is the husband of U.S. Sen. Dianne Feinstein and a professional Wall Street speculator, sat on a panel called "The New University and Its Role in the Economy," alongside the presidents of the Massachusetts Institute of Technology and Arizona State University. The panel focused on how universities can best serve the corporate jones for tech-savvy employees by recruiting smart freshmen with scientific talent. One panel member urged treating universities as "laboratories of business ideas and products."

As someone who oversees investment policy decisions for the University of California's $63 billion portfolio, and as the largest shareholder in two for-profit corporate-run universities (in which UC invests), Blum had a unique perspective to share at the conference. He advised public universities to attract business-oriented students with clever advertisements as vocational schools do.

"It's like anything else," he said. "It's how you market it."

Marketing strategy aside, Blum has taken on two seemingly disparate roles—one as an advocate for a nonprofit university, and the other as an owner of two for-profit educational corporations. However, as a regent, Blum has taken actions that, intentionally or not, have enhanced the value of his vocational schools. Are his loyalties conflicted?

For several years, Blum's firm, Blum Capital Partners, has been the dominant shareholder in two of the nation's largest for-profit universities, Career Education Corporation and ITT Educational Services Inc. The San Francisco–based firm's combined holdings in the two chain schools is currently $923 million. As Blum's ownership stake enlarged, UC investment managers shadowed him, ultimately investing $53 million of public money into the two educational corporations.

The Regents' conflict-of-interest policy requires them to "avoid the potential for and the appearance of conflicts of interest with respect to the selection of individual investments," and says "public officials shall not make, participate in making, or influence a governmental decision in which the official has a conflict of interest." And the California Political Reform Act of 1974 provides civil and criminal penalties for officials who ignore conflicts of interest—as UC makes clear in ethics training presentations specifically created for university officials.

The Board of Regents, however, is self-policing and tolerates situations that cause others concern. John M. Simpson of Consumer Watchdog, a nonprofit education and advocacy organization based in Santa Monica, says that's wrong.

"It is hugely inappropriate for the University of California to invest in for-profit colleges when it should be promoting public education," Simpson says. "And something stinks when university investments end up in companies largely controlled by a regent.

"To the average fellow on the street, this would seem to be a conflict of interest. It is up to Mr. Blum and the UC treasurer to explain how it could not be a conflict of interest."

THE BUSINESS OF EDUCATION: While UC students were protesting budget cuts last spring (far right), the firm owned by UC Regent Richard Blum (right) was enjoying record dividends from its investment in for-profit colleges. Photograph by Jim Block

Disaster Capitalism

Due to serial tuition hikes by the UC Regents, their gutting of many classes and educational programs, and the imposition of a 15 percent reduction of in-state admissions to the university, the gateway to higher learning in California has seriously narrowed. As a UC regent, Blum voted in favor of all of these measures—and such actions have indirectly benefited his corporate colleges. But his schools are not the only ones profiting from the financial disaster that besets many public universities.

On March 13, 2010, The New York Times investigated the situation, reporting that many chain schools, including ITT Educational Services and Career Education Corporation, "have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal aid ... selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty."

The Times noted that for-profit schools are directly benefiting from cuts in education, especially in California where state-funded universities and community colleges have been "forced to cut classes just when demand is greatest."

Indeed, ITT Educational Services recently reported to its shareholders that due in large part to "higher unemployment rates among unskilled workers," company revenue increased by $300 million, to $1.3 billion. Responding to a recession-induced increase in demand for vocational training, ITT increased its tuition by 5 percent; 70 percent of ITT's revenue comes from federal tuition aid programs. And ITT's profits rocketed in tandem with new enrollments even as UC and other public universities were turning away students for lack of programs.

Nationwide, vocational school students are paying billions of dollars in tuition to stockholder-owned education corporations, primarily using federal grants and loans guaranteed by taxpayers. In the United States, the dominant vocational education corporations are the University of Phoenix, Corinthian Colleges, Strayer University, Kaplan (owned by the Washington Post Company), Career Education Corporation and ITT Educational Services. Collectively, these companies operate hundreds of schools and teach hundreds of thousands of students, most of them eligible for public and private financial aid. The chains offer training for such technical professions as radiological technician, beautician, automotive mechanic, medical billing clerk, web designer and massage therapist. But they also offer degrees in engineering, computer science and business. Increasingly, they are promoting online education, which limits their operational costs, even though virtual courses are often not suitable for teaching nursing, cooking or car repair. As a result of delivering substandard education, some for-profit schools suffer from accreditation problems, according to recent news reports.

On a fairly regular basis, government regulators—including the U.S. Department of Justice—have accused chain schools of preying upon low-income individuals and active military service members. Typically, state and federal agencies report, chain school recruiters load students down with high-interest rate loan packages that, on average, amount to $30,000. As a result, fewer than 70 percent of enrollees graduate. Such a high dropout rate requires the corporations to continuously wage television, radio, Internet and print media marketing campaigns aimed at enticing students who want to better themselves—and who are, not incidentally, eligible for state-guaranteed loans.

Unfortunately, those who do graduate with two-year associates degrees often find out that the curriculum did not prepare them for the technical requirements of the jobs they seek. And often, government reports note, when they do find work, their wages do not match the inflated salaries promised by school recruiters. When dropouts and underpaid graduates default on their student loans, the taxpayers remain on the hook.

Profits of Doom

Blum's investment bank entered the for-profit education business in 1987, when he purchased a large block of shares in National Education Corporation, an Irvine-based vocational school that specialized in awarding mail-order diplomas. He joined the company's board of directors, sitting alongside former U.S. Sen. Barry Goldwater and David C. Jones, a former chairman of the Joint Chiefs of Staff.

Two years later, according to a report in the Los Angeles Times, Blum got in hot water when angry shareholders filed a lawsuit contending that "the company issued rosy financial statements while Blum and other directors were selling their shares." The shareholders claimed in court documents that Blum sold $2.7 million worth of shares at about $24 per share after he learned, a day before the public announcement, that the company president planned to resign. When the share price bottomed out at $3.50 a share after the announcement, Blum reinvested in the troubled company.

A new president was hired in 1994 to reform the school and bring it into the age of computerized learning. By 1995, Blum had gained control of 11.5 percent of National Education Corporation stock after combining his firm's holdings with that of a nonprofit investment fund, Commonfund, for which Blum worked as an investment advisor. (Commonfund manages investments for more than 1,400 universities, including UC.) In 1997, Harcourt, the textbook publisher, bought National Education Corporation for about $750 million, or $21 a share. Blum and his private partners profited handsomely.

After he became a regent in 2002, Blum greatly increased his investment in for-profit education. In June 2005, Blum Capital Partners bought 5 percent of the stock, worth $24 million, in Lincoln Education Services Corp., a $300 million operation with 32 campuses. Blum also acquired large blocks of shares in ITT Educational Services and Career Education Corporation. These two purchases followed dips in the companies' stock prices brought about by allegations of corrupt practices made against them by government agencies.

In the case of ITT Educational Services, federal and state regulators investigated the company in 2004 after shareholders and students alleged that it falsified student attendance, grades and job placement records in order to keep federal financial aid flowing. When the news broke, the price of ITT shares halved.

Blum Capital Partners pounced, purchasing reams of devalued ITT stock. It soon owned the largest block of stock in the company, achieving a 10 percent ownership stake in 2006. Not long afterward, the investigations were closed, with no findings of wrongdoing. By May 2010, ITT's revenue exceeded $1.3 billion, and Blum Capital Partners' stake was valued at $415 million.

Similarly, Blum Capital Partners bought shares of Career Education Corporation, a $1.8 billion operation that serves 90,000 students, following a corruption controversy. In 2004, Career Education Corporation was investigated by multiple federal agencies after whistleblower lawsuits alleged that the school had allowed failing students to remain enrolled in order to keep its pipeline to federal grants and loans tapped. In 2005, after 60 Minutes televised an unfavorable story about the chain school, the value of its stock dropped by more than half. Blum Capital Partners bought in for $33 million. By May 2010, its stake had grown to $508 million, making Blum's firm by far the largest and most powerful shareholder of the chain school. A partner with Blum Capital Partners, Greg L. Jackson, sits on the board of Career Education Corporation.

UC is an investor in both educational corporations. Even as Blum was buying stock in Career Education and ITT Educational Services, UC financial records show that the university's investment managers were actively buying and selling these same stocks—to the tune of $53 million. The university was not just holding onto these stocks to accrue value over time (as a prudent manager would do), it was day trading them in large amounts, as much as
$2 million a trade, thereby affecting the daily price of these stocks. Did the fact that these two companies were largely owned by a regent—a Wall Street speculator who sat on the university's investment committee—not pose at least the appearance of a conflict?

Not to UC officials. When UC Treasurer Marie Berggren was questioned about the propriety of UC investing in Blum's for-profit college chains, her spokesman, Steve Montiel, replied by email, "The Treasurer's Office doesn't track Regents' holdings in making decisions about security selections, though Regents' holdings are disclosed as a matter of policy."

In other words, the treasurer does not review the Regents' financial disclosure statements, which are public records, for potential conflicts. Of course, UC's investments are also public records available to the Regents, so a regent could easily avoid conflicts, should he or she choose to do so, by not taking controlling positions in companies in which the university invests.

Blum did not respond to repeated requests for comment. But UC spokeswoman Lynn Tierney called on his behalf, saying that the university recruits its students from the intellectual elite of applicants. Only those with very high grade averages and SAT scores get in, she said. Therefore, "UC is not losing students to Blum's vocational schools, and there is no conflict of interest," she said.

The bottom line is that UC is investing tens of millions of public dollars in two for-profit school chains largely controlled by a regent and Wall Street arbitrager who sits on UC's investment committee. Shown the documentation used to support this story Noah Stern, president of Associated Students at the University of California, says, "Student trust in the Regents was already shaky. In light of this revelation of investment abuse, we need a structural overhaul of the university governance system."

This story is part of a ongoing series of investigative stories sponsored by Spot.us and six Bay Area newsweeklies: 'UC Regents: An Elite Club That Runs a Vast University.'